This briefing, produced by the NPC's Pensions & Income working party, attempts to give individuals an insight into the world of Annuities – a world that is often (like other pension and insurance worlds) a minefield and as we have found out, not as safe as you might think.
You can download the briefing below
Introduction:
The National Pensioners Convention is the largest campaigning organisation for older people in the UK. Our founding principles are ‘every pensioner has the right to choice, dignity, independence and security as an integral and valued member of society.’ We campaign for todays and tomorrow’s pensioners to ensure that all future pensioners have the same financial security and access to public services.
This briefing attempts to give individuals an insight into the world of Annuities – a world that is often (like other pension and insurance worlds) a minefield and as we have found out, not as safe as you might think.
The dangers and risks are various, none more so than the reliance on the public being financial ‘experts’ and able to understand and look after their investments. A major issue is the impact on those with Defined Contribution schemes who are currently unaware of what an annuity is and that it could be transferred without consent or choice. Regardless that the Financial Services Compensation Scheme indemnifies annuity holders against losses due to the failure of providers to act appropriately, the dangers and risks posed are important to understand.
What is an Annuity?
An annuity is an insurance product that allows you to swap your Defined Contribution (DC) pension fund for a guaranteed regular income that will last for the rest of your life. The amount depends on your fund and the current annuity rate offered.
Annuities vary and it's important to buy the right one for your circumstances, because you can't change your mind later. You will need to consider:
whether you want protection against inflation
how much risk you’re prepared to take
whether anyone else is dependent on you for income and you want to provide a survivor annuity
what your state of health is, and whether you are a smoker, as this can affect your annuity rate
Other options for your pension fund
As retirement approaches, the 'Pension Freedom' options, besides annuitisation, are reinvestment, regular drawdown, cash withdrawal, or a mixture, none of them attractive due to historically low annuity and interest rates, over which retirees have no control. Each option carries risk but only the well-off can afford independent financial advice to help guide their decision.
Is my annuity safe?
An increasing number of employees are being auto enrolled into DC workplace pension schemes chosen by their employer. They face not only uncertain returns on their contributions, bearing all the risk, but also difficult choices, as outlined above, when they approach retirement; Having carefully read the sales pitch from annuity providers and chosen a fixed income, or a market-related income, ‘for life’, (which can include a partner’s life), you may feel you have obtained a secure income that meets your needs.
However, annuity policyholders are not told that their business can be transferred to a provider they had rejected, perhaps because it lacks adequate capital, reliable service, or an established reputation for stability. This is glaringly inconsistent with having been advised to shop around! And if you object to that transfer, you have no right to choose a provider that you prefer.
The only protection against your annuity being transferred against your will is that the insurance companies involved must satisfy a High Court judge, the Prudential Regulatory Authority (PRA) and an 'independent' expert (paid by the insurance companies) that the transfer ‘will not materially disadvantage the policyholders’ (FSMA, 2000). Most transfers go through on the nod, although in the recent Prudential/Rothesay case, the transfer was opposed in court by policyholders and the judge found in their favour, stopping the transfer.
Unfortunately, an appeal by the companies involved in the transfer was upheld late last year, the case has been re-tried in the High Court. In November 2021 the High Court decided to uphold the appeal by the insurance companies and allow the transfer to go ahead.
Annuity Policy-holders have some protection, in the event of provider insolvency, by the Financial Services Compensation Scheme (FSCS) at 100%. However, we are not reassured by this for two reasons.
1. If an annuity-providing company moves its registered office out of the UK, annuitants will lose protection by the FSCS. This is more likely to happen when the provider’s backers are foreign-based companies who, due to Brexit, might prefer to move out of the UK.
2. If the annuity-provider has invested recklessly, or taken on more policies than they can support with their available capital, it can become a Ponzi scheme (where existing annuitants are paid from the capital sum acquired from transfers of liability). This can leave insufficient to pay the newly-acquired annuitants and result in eventual insolvency. If taxpayers’ money is used to compensate policyholders, this lets insurance companies off the hook.
Pensions and the wider policy context
Since the 1980s, successive governments have aimed to reduce the state’s role in welfare, instead promoting (and subsidising) market-based pensions, with similar changes in social care, housing and education. The underlying ideology is that citizens will become 'financially capable' and responsible for their own welfare. This is unrealistic, especially since financial experts failed catastrophically to anticipate, let alone prevent, the crash of 2007-8. Research on retirement planning shows the public is ill-equipped to optimise later life income through education in finance.
A universally-inclusive, fully portable state Pay As You Go earnings-related pension with care credits has been replaced with a confusing market-based system imposing multiple risks in both the accumulation phase (while contributing) and the decumulation phase (while drawing a pension).
The risks faced by annuity holders – of buying their annuity at a time of low rates and of being transferred without consent – reflect the trend to place pension risk on individuals. In the case of Defined Contribution (DC) pensions, workers can find themselves impoverished in later life through no fault of their own. Their employer, who chooses the scheme, may make only the minimum contribution, with poor investment performance and high charges. Thus people often find their pension fund inadequate, especially if there are gaps in earnings due to caring responsibilities or precarious employment. Portability of pension funds on changing employer is restricted by high transfer fees, leading to multiple small pension pots.
Conclusion
It is essential that annuity providers are compelled to inform all potential policy holders that their annuity can be sold without their consent (sometimes more than once) to another company that may have been previously rejected by the policyholder. The likelihood of annuity holders preventing transfer through the current legal procedures are slim, unless the law (FSMA 2000) is amended.
Instead of expanding auto enrolment into market-based DC pensions with all their complexity and risk, both in building the fund and at retirement, NPC advocates a Voluntary Earnings-related State Pension Addition (VESPA). State pensions are fully portable and inclusive, protecting those with care responsibilities, whereas private pensions serve the interests of the high paid and employers (through tax relief on contributions) and the finance industry.
The NPC will campaign for the rights of those who have been sold annuities to be given notice that their policy may change hands at any time.
Notes
(a) FSMA (2000) The Financial Services and Markets Act created regulations for insurance, investment and banking, including for transfer of annuity business.
(b) If you want to find out more in order to write to your MP, contact NPC on info@npcuk.org